International Economics.ppt

International Economics Trade, The Balance of Payments and Exchange Rates Trade Buying and selling goods and services from other countries The purchase of goods and services from abroad that leads to an outflow of currency from the UK – Imports (M) The sale of goods and services to buyers from other countries leading to an inflow of currency to the UK – Exports (X) The Flow of Currencies: Specialisation and Trade Different factor endowments mean some countries can produce goods and services more efficiently than others – specialisation is therefore possible: Absolute Advantage: Where one country can produce goods with fewer resources than another Comparative Advantage: Where one country can produce goods at a lower opportunity cost – it sacrifices less resources in production Comparative Advantage Comparative Advantage Comparative Advantage In Russia, oil can be produced cheaper than in Scotland (Russia only sacrifices 1 litre of whisky to produce 2 extra barrels of oil whereas Scotland would have to sacrifice 2 litres of whisky to produce 1 barrel of oil. Comparative Advantage Comparative Advantage Total Output has risen and trade can be arranged at a mutually agreed rate that will leave both countries better off than without trade. The rate has to be somewhere between the OC ratios (in this case 2 and ?) e.g. If the trade were arranged at 1 barrel of oil for 1 litre of whisky the end result would be: Comparative Advantage The Terms of Trade The Terms of Trade looks at the relationship between the price received for exports and the amount of imports we are able to buy with that money. The Balance of Payments A record of the trade between the UK and the rest of the world. Trade in goods Trade in services Income flows = Current Account Transfer of funds and sale of assets and liabilities = Capital Account Balance of Payments Exchange Rates The rate at which one currency can be exchanged for another e.g. ￡1 = $1.90 ￡1 = €1.50 Important in trade Exchange Rates Conv